The worst-kept secret in companies has been that the yearly ritual of evaluating the performance of employees epitomizes the absurdities of corporate life.
Managers and staff alike often view performance management as time consuming, excessively subjective, demotivating, and ultimately unhelpful.
In fact, according to McKinsey & Company's Ahead of the curve: The future of performance management, performance management may even undermine an employee's performance as they struggle with ratings, worry about compensation, and try to make sense of performance feedback.
According to McKinsey, these aren’t new issues, but they have become increasingly blatant as jobs in many businesses have evolved over the past 15 years. More and more positions require employees with deeper expertise, more independent judgment, and better problem-solving skills. They are shouldering ever-greater responsibilities in their interactions with customers and business partners and creating value in ways that industrial-era performance-management systems struggle to identify.
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In fact, most corporate performance-management systems, McKinsey asserts, don’t work today, because they are rooted in models for specializing and continually optimizing discrete work tasks.
These models date back more than a century, to Frederick W. Taylor.
Over the next 100 years, performance-management systems evolved but did not change fundamentally. A measure like the number of pins produced in a single day could become a more sophisticated one, such as a balanced scorecard of key performance indicators (KPIs) that link back to overarching company goals. What began as a simple mechanistic principle acquired layers of complexity over the decades as companies tried to adapt industrial-era performance systems to ever-larger organizations and more complicated work.
Changing Organizational Performance Management
The changes many enterprises are making today, as McKinsey points out, are new, varied, and, in some instances, experimental. But patterns are beginning to emerge, as evident in these five factors highlighted by the minds of McKinsey.
- Some companies are rethinking what constitutes employee performance by focusing specifically on individuals who are a step function away from average — at either the high or low end of performance — rather than trying to differentiate among the bulk of employees in the middle.
- Many companies are also collecting more objective performance data through systems that automate real-time analysis.
- Performance data are used less and less as a crude instrument for setting compensation. Indeed, some companies are severing the link between evaluation and compensation, at least for the majority of the workforce, while linking them ever more comprehensively at the high and low ends of performance.
- Better data back up a shift in emphasis from backward-looking evaluations to fact-based performance and development discussions, which are becoming frequent and as-needed rather than annual events.
- One interesting new trend is also escalating, the growing need for companies to inspire and motivate performance makes it critical to innovate in coaching — and to do so at scale. Without great and frequent coaching, it’s difficult to set goals flexibly and often, to help employees stretch their jobs, or to give people greater responsibility and autonomy while demanding more expertise and judgment from them.
Companies in high-performing sectors, such as technology, finance, and media, are ahead of the curve in adapting to the future of digital work.
So it’s no surprise that organizations in these sectors are pioneering the transformation of performance management. More companies will need to follow—quickly. Meanwhile, companies still have to keep a keen eye on employees who are truly outstanding and on those who struggle.
McKinsey & Company featured the expressed views in the McKinsey Quarterly.